Bailout Feared if Airlines Shed Their Pensions
In an echo of the savings and loan industry collapse of the 1980's, the federal agency that insures company pensions is facing a possible cascade of bankruptcies and pension defaults in the airline industry that some experts fear could lead to another multibillion-dollar taxpayer bailout.
Now experts say they see similar forces gathering in the pension sector, with United Airlines perhaps the first to go down the path. Operating in bankruptcy, United is striving to attract the lenders and investors it needs to survive. It said last month that it would no longer contribute to its pension plans; United also seems intent on shedding some or all of its $13 billion in pension obligations as the only way to succeed in emerging from bankruptcy proceedings.
"The pension insurance program is there to protect workers' benefits," said Mr. Belt, who took over the agency in April. "It shouldn't be used as a piggy bank to help companies restructure."
Already, some airline employees are taking steps to protect themselves against future pension losses. Each month, for example, about 30 pilots normally retire from Delta Air Lines. But in June, almost 300 did.
[There is a benefit to being retired at the time a company goes under rather staying on to the bitter end - Mish]
The Pension Benefit Guaranty Corporation is already hobbled by debt, having picked up the pieces of more than 3,200 failed pension plans in its 30-year life. The scale of the failures has risen sharply in the last three years, but the agency has few tools at its disposal to prevent the situation from becoming worse.
Now it faces a possible $5 billion default by United - which would be a record - and the possibility of more big airline defaults after that.
United has been operating in bankruptcy proceedings since December 2002. Already, it has negotiated significant concessions from its workers, suppliers, landlords and others. United says it is still analyzing what to do with its pension plans.
In June, the Air Transportation Stabilization Board turned down United's request for federal loan guarantees, saying it believed the airline could get financing without government help. So far, United has not been able to. Until it does, it cannot emerge from bankruptcy proceedings.
It is an open secret that prospective financiers are turned off by the roughly $13 billion of pension debt United is carrying on its books - the one big block of debt that the airline has left untouched so far. That figure is the value, in today's dollars, of the pensions that United's pilots, flight attendants and other workers and retirees have earned. Once a pension has been earned, it cannot legally be taken away.
By law, this debt to the work force is to be secured by the money United sets aside in its four big pension funds. But as things have turned out, United had only about $7 billion in the pension funds as of last December. The remaining $6 billion is unsecured debt.
[This is what galls me about the bill Congress passed, delaying 2 years companies having to fund their pension plans AND most galling upping the assumptions about who well those plans are going to do - mish]
Pension law and bankruptcy law differ on the implications of this: pension law says the $13 billion owed to the workers cannot be taken away, while bankruptcy law says the workers are unsecured creditors with respect to the $6 billion shortfall. And unsecured creditors usually lose in a bankruptcy case.
The pension debt, and the $7 billion United has already set aside in pension assets, will go to the federal pension agency, which will pay the airline's retirees their benefits, but only up to certain limits.
[Retirees get screwed with lower benefits and taxpayers get screwd by funding the deficit - mish]
"If a bankruptcy court allows a company to terminate its pensions, then that becomes a very tempting business tool."
That is what happened in the steel industry. LTV Steel's pension fund fell to the government in March 2002, and its unencumbered assets - steel mills, coke and lime plants, railroads and other properties - were snapped up at once. That put pressure on other tottering steel companies to shed their pension plans as well.
Seven more failing steel plans went to the government before the year was out, including the current record-holder among pension defaults, the Bethlehem Steel plan, which cost the pension agency $3.9 billion to take over.
[Rest assured there is more where this cam from, steel workers, airlines, telecom companies, auto workers, etc etc etc - we have only just begun to screw retirees and what they do get will be at taxpayer expense - mish]
It wasn't supposed to be this way. In 1974, Congress responded to an ugly string of pension failures in the auto industry by passing landmark legislation. From then on, any company that promised pensions to its workers would be required to set aside enough money to pay them. Rules were written to determine how much money was enough.
[Now this Congress decides to postpone the day of reckoning for funding the plans by two years and bumps up assumptions about plan performamce at the same time. - what a crock of horsesh*t - mish]
United's pension plan developed its multibillion-dollar shortfall, in part, because pension law allows companies to fund their plans with the assets that any prudent investor would select. Over time, that has meant a shift away from the very conservative bonds that companies used to secure pensions before the 1974 law, in favor of more aggressive investments.
As the pension system has weakened, some specialists have called for measures that would discourage the riskiest investments. As director of the pension agency, Mr. Kandarian proposed charging higher insurance premiums to companies that invested their pension funds in riskier assets, particularly companies that were in bad shape themselves. No one paid attention.
[People seldom pay attention to good advice - mish]
Along with Mr. Kandarian, current officials at the pension agency and at the Treasury Department have also been calling for a tightening of the rules requiring pensions to set aside enough money to meet their obligations. In April, Congress loosened the rules instead. The biggest flexibility was given to the most troubled industries, making their pension funds look healthier.
"Doctoring the numbers is all they're doing, and they're especially doing it for steel and airlines," Mr. Benston said. "Shades of the savings and loan crisis. Same darn thing."
[above were some snips with my comments - I recommend reading the whole thing - mish]
nytimes.com |
